Corn Stocks, Yields Drive Feed Prices Higher

Last Friday’s USDA Crop Production and World Supply and Demand Estimates reports have made this week’s column much darker and foreboding. Just eight short days after finding 300 million bushels more corn in Sept. 1 inventories (i.e. year-end or carryout inventories for the 2009-2010 crop year), USDA reduced its forecasts of 2010 corn yield and total crop size enough to push projected year-end stocks in 2011 to less than 1 billion bushels.

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Last Friday’s USDA Crop Production and World Supply and Demand Estimates reports have made this week’s column much darker and foreboding. Just eight short days after finding 300 million bushels more corn in Sept. 1 inventories (i.e. year-end or carryout inventories for the 2009-2010 crop year), USDA reduced its forecasts of 2010 corn yield and total crop size enough to push projected year-end stocks in 2011 to less than 1 billion bushels. That level puts the projected year-end-stocks-to-use ratio at its lowest level since 1995-96 and the second lowest level in my data set, which goes back to 1969.

The first number to note in Table 1 is the sharply reduced feed and residual figure for the 2009-10 crop year. USDA had to account for the low Sept. 1 stocks figure and did so by reducing feed/residual by 7.5% from its September estimate. That figure would mean Q3 feed/residual usage would amount to only about 200 million bushels compared to 600-700 million bushels the past three years. Pretty ridiculous.

Two facts are important. First, this category does include residual, so it also catches all of the errors in the other categories. We usually focus on the feed component and that is normally an acceptable practice. But when weird things are happening, the residual part of this number can become large. That doesn’t provide much clarity, but it must be recognized as an important issue in this case.

Second, last year’s poor corn quality could be at play here. I have heard many reports of barges and elevators at export ports filled with poor quality 2009 corn. That poor quality corn is waiting for better quality new crop corn to be blended in to meet minimum export standards. The “held” corn would make Sept. 1 stocks larger than normal. In addition, the poor quality of the 2009 crop created tremendous incentives to feed new-crop corn that was harvested before Aug. 31. That would cause old-crop inventories to grow even further and would mean that less of the 2010 crop is still available for the coming crop year.

As for this year’s crop, it all revolves around yield. USDA’s estimate was 5.7 bushels below the September estimate and 4.3 bushels below the average of analysts’ pre-report estimates. USDA actually increased planted and harvested acres by 350 and 258 million, respectively, but the increases were not enough to offset the 5.4% decline in expected yield. The crop is pegged at 12.664 billion, 3.8% smaller than the September estimate and 3.4% smaller than last year’s record.

The only major changes for usage numbers were a sharp increase in feed/residual (at least partially a rebound effect of the discussion above) and a 100-million bushel reduction in forecast exports, a pretty likely result of much higher prices.

Feed Prices Climb The bottom line of these changes is, of course, higher feed prices. As can be seen in Figure 1, USDA’s forecast of average farm price of $4.60 to $5.40/bu. is far and away a record, eclipsing the 2007-08 price primarily because the run-up is occurring so close to harvest when many farmers still have most of their crop to sell.

The news was better for soybeans and soybean meal, but the direction there was the same – lower-than-expected output and higher prices. A lower yield (44.4 bu./acre vs. 44.7 bu./acre), smaller crop (3.408 billion vs. 3.483 bushels) and higher exports resulted in projected ending stocks falling from 350 million bushels to 265 million bushels. The resulting decline in projected year-end stocks-to-use ratio from 10.6% to 8.0% pushed USDA’s forecast for average soybean price to $10.00 to $11.50/bu. and added $20 to each end of the projected soybean meal price range, pushing them to $290 to $330/ton.

Hog Futures Prices Follow, but Profits Still Slip Higher Lean Hogs futures prices on Friday offset much of Friday’s increase in corn and meal prices, but projected 2011 profits still fell. Figure 2 shows forecast costs, hog prices and profits based on Friday’s closing futures prices for corn, soybean meal and lean hogs. The $3.98/head projected profit is the lowest I have estimated so far for 2011, and it compares to my first estimate for all of 2011 (made in early August) of $9.22/head. Back in June, I estimated that producers could lock in profits of roughly $20/head for January-July of 2011. That number is now $5.47/head.

Game Plan: Play Defense So what can you do? You need to begin playing defense on the cost side. This situation spells big risks for next summer as carryout stocks will be low and any problems with planting or crop weather will very likely cause higher prices in an effort to increase carryout and add to available supplies in 2011-12. Nobody likes buying $5/bu. corn, but it is a darn sight better than $6/bu. or $7/bu. corn. Soybean meal is pricey as well, but my usual admonition to watch the South American crop applies here in spades. We could get some help in the spring if southern hemisphere weather is good.

As for hogs, it never hurts to lock in profits, but the uncertainty of this crop and resulting costs as well as new marketing and production contract rules from the Feds are all discouraging expansion. In addition, higher grain prices will drive higher livestock futures prices in this “fund-aided” or “fund-driven” world where funds are almost always long and must rebalance their positions. I would be in no hurry to sell beyond the fourth quarter unless your financial position is still weak. Look for technicals to tell us that the rally that began Friday is over before pulling the trigger. And think long and hard before pricing hogs for which you do not also have feed priced. The latter could get wild in 2011.

As always, your pricing strategy should be driven by your risk preferences and financial position and executed with the full knowledge and support of your lender.